LOS ANGELES — In a potentially precedent-setting decision, Alameda, Calif., prevailed in California court over municipal bond investors who alleged securities fraud and sought damages after the city sold its cable television system for less than what was owed on the bonds that financed it.
The case filed by Vectren Communications Services, Inc. was the last of three lawsuits filed against the city after it sold the system in November 2008 to Comcast.
"Barring an appeal, this will bring to an end almost six years of litigation and claims which originally exceeded $25 million against Alameda," said Richard Elder, a partner with law firm Wulfsberg, Reese & Colvig, which represented the city.
In her final judgement March 31, District Court Judge Susan Illston awarded Vectren nothing in damages, according to court documents. Vectren has 30 days to appeal. The telecom company's attorneys didn't respond to requests for comment.
The three related cases raised a number of novel securities and legal issues and could have wider implications in cases alleging fraud by municipalities, Elder said.
"In the Vectren case, the court explicitly recognized that municipal finance deals are extensively negotiated, carefully drafted, and often reflect an element of political compromise," Elder said.
In each of the three cases, the purchasers were looking to circumvent the terms of the deal that the people of Alameda had agreed to in issuing the securities, said Greg Aker, another Wulfsberg, Reese & Colvig principal, who also represented the city. The revenue anticipation notes and certificates of participation were limited to revenues specifically from the cable and internet services portion of the utility, but the litigants tried to impair revenues from the city's electric utility and also the city's general fund, he said.
The judge found that in no circumstances could the "purchasers of securities look to assets outside the telecomm system," Aker said.
Vectren was seeking $10 million in damages on COPs it held. A jury had ruled in favor of Vectren on one claim involving accounting issues and awarded the company $1.9 million, but the U.S. Ninth Circuit Appeals Court reversed the jury verdict in August reducing damages to zero. The appeals court sent another claim - that Alameda had breached a contract by selling the system - back for a trial on damages, Elder said. That was the claim Illston recently ruled on.
"The judge recognized that municipal finance deals are political compromises," Vectren said. "The investors are subject to the deal they agreed to - even if they claim misconduct occurred that deprived them of their revenue."
Alameda's attorneys could only find one other case, in Michigan, where investor attorneys argued that egregious behavior by issuers could be used to circumvent non-recourse provisions, Elder said.
The claimed misconduct was the sale of the cable TV and internet service to Comcast. Alameda's attorneys argued the possibility of a sale of the system was included in the bond documents. Attorneys for the investors argued that it was not.
Vectren had struck an agreement in 1999 to build a $14.8 million cable television and internet services system for Alameda residents; and then manage that system for five years for a 10% management fee. In early 2002, Vectren wanted out. An agreement was reached in which the city would complete construction of the project and manage it. Vectren was to receive installment payments totaling no more than $6.3 million, plus 5% interest, over a five-year period starting in 2005.
In 2004, the city issued $33 million in unrated revenue bond anticipation notes, the bulk of which were purchased by Nuveen and Bernard Osher Trust, as takeout construction financing and to refinance outstanding debt.
Alameda paid the bondholders of the unrated 2004 RANs the entire $15 million it received from the 2008 sale, but that amount equaled less than half of the $33 million owed to Nuveen and Osher. Vectren received nothing from the sale.
Nuveen and Osher used securities law to make the claims in lawsuits they filed against the city. In an appeals court ruling against Nuveen's case, the three-judge panel found under California securities law the city is not liable for negligent or intentional misrepresentation by an employee. Nuveen also lost on a federal securities claim when the appeals court ruled that Nuveen failed to show a link between "the claimed misrepresentations and the economic loss the purchasers suffered when the city sold the cable and Internet system."